The Empirical Of Chinese And American Treasury Bond Market Comovement And Mechanism Analysis

Yield curve of the treasury bond market is a benchmark for asset prices of the entire finance market. It also reflects the macroeconomic conditions and people’s expectation on the future economic dynamics. The linkage of China and US yield curves not only matters for both economies and their financial markets, but also influence individual firms, households and investors in their saving and investment decision.This paper investigate the dynamic relationship between China and US yield curves. We study the linkage of yields of the same maturities, yield factors in both markets with Granger causality test. The results shows that China’s yields Granger cause US yields at the monthly frequency using the sample from2002to2013, and there are mutual effects between China and US yields after the financial crisis when we use a sample of weekly data.In view of this, we model the yield factors of each economy with two indicators of exchange risk and capital flows in a VAR to study the mechanism of their joint dynamics. We form a reduced-form yield curve model with these international factors for each economy, and we also form a joint model of both yield curves and the international factors in an open economy model. Through the VAR model estimation for the specifications, we find that China and US yield curves and these international factors have mutual influence. The linkage of the yield curves reflects the interaction between the real economy and financial market. While Sino-US trade contribute to the mitigation of US inflation, hence influence the level of US yields, hot money inflows to China cause variations of China’s interest rates and the USD/CNY exchange rate more effectively.